Standards on auditing

SA 315: Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment

• Usually, those controls which pertain to entity’s objective of preparing financial statements are subject to risk assessment procedures
• Obtaining an understanding of entity and its environment including entity’s internal control is a continuous, dynamic process of gathering, updating and analyzing information throughout the audit
• To identify and assess risks of material misstatement at financial statement level, and at assertion level for classes of transactions, account balances and disclosures
• Auditors are required to: Relate identified risks to what can go wrong at assertion level; Consider potential magnitude of risks in the context of financial statements; Consider the likelihood that risks could result in a material misstatement of financial statements
• Documentation should cover: Discussion among engagement team; Key elements of understanding obtained; Sources of information; Risk assessment process; the identified and assessed risks; Significant risks evaluated; Risks evaluated for which substantive procedures done
• Auditor uses professional judgment to determine the extent of understanding required. Auditors primary consideration is whether the understanding that has been obtained is sufficient to meet the objective stated in the SA

SA 320: Materiality in Planning and Performing an Audit

• SA 320 deals with the auditor’s responsibility to apply the concept of materiality in planning and performing an audit of financial statements
• In planning the audit, the auditor makes judgments about the size of misstatements that will be considered material
• These judgments provide a basis for:
• Determining the nature, timing and extent of risk assessment procedures;
• Identifying and assessing the risks of material misstatement; and
• Determining the nature, timing and extent of further audit procedures
• For purposes of the SAs, performance materiality means the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures